Advanced technology like air conditioning system for electric hybrid batteries.

and W.E.T which is a global manufacturer of automotive seat comfort systems. Although the products overlap with the Climate Controlled Seats, it operates independently

Their products are mostly options for new car purchases. Some a standard on higher end cars, but heated arm rests and doors are options.

When my wife got her car, she wanted all the options and I remember wanting to choose specific upgrades because I didn’t need things like heated steering wheel, a backup camera or an auto dimming rear view mirror.

But car manufacturers are obviously smarter than me.

Instead of allowing me to choose and only upgrade the bare minimum, the only option was to choose between upgrade “packages”.

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What’s to Like

It’s dependent on the auto industry and downturns will obviously affect Gentherm. But because they are OEM’s and not aftermarket or branded products, car manufacturers still require a solid and proven supplier to provide those heated seats and temperature controlled cup holders.

With so many recalls of late in the auto industry, the last thing car manufacturers want to do is recall thousands of cars due to a faulty thermal electronic module that is a fire or safety hazard.

In fact, there’s quite a lot to like about the business.

Gentherm’s business and fundamentals actually boomed due to the acquisition of W.E.T in 2011. If you take a look at the financials, revenues increased by 230% in 2011 compared to 2010.

Growth has come rapidly as more people started to replace their cars as we eased out of the recession.

Wide Customer Base with Significant Customers

Their customer base is spread out so it’s not reliant on a single company.

Check out their list of customers.

The big names in the auto industry are all there.

5 manufacturers exceed 10% of revenues and although a customer making up more than 10% of revenues looks risky, you have to understand that in the auto industry, getting a part into a car takes a very long time.

A few years back, I used to monitor the testing of bluetooth audio systems for different car manufacturers.

One thing I learned is that the process to get the bluetooth system into a car took about 4 years.

Unlike the mobile phone industry where suppliers are replaced in a matter of months, the life cycle of a car is much longer. A design update takes about 4 years and until then, it’s highly unlikely that any significant change is released year over year.

So once you’ve won a contract, provide quality items at a competitive price and it’s unlikely that you’ll get replaced.

Patented Technology

The business has a patent for most of their products and despite the company manufacturing “boring” products, they spend a lot of money into their technology and coming up with new things.

Instead of just being branded as a heated seat company, they work to break that mold by aiming higher with thermo electric products.

Here’s a look at how Gentherm has been spending money.

Consistent R&D as a % of Revenue | Enlarge

Compare Gentherm to peers like Johnson Controls (JCI) or Lear Corp (LEA) who don’t even have an R&D expense line on their income statement.

I don’t think it will be easy to win contracts when competing against Gentherm.

Global Supply Chain

With customers located all over the world, getting everything done in China isn’t going to be efficient.

Heated seats or thermoelectric units aren’t small electronics you can wrap in bubble wrap and ship to your customers. These are oversize products and there’s a limit to how much can fit inside a freight container.

They manufacture in Mexico, Ukraine and China.

This way, Gentherm can ship their stuff to the Americas, Europe and Asia efficiently.

Political issues with Russia is a real threat to the Ukraine location.

What’s to Dislike – Slowing Growth

Gentherm isn’t a perfect company though.

When the company was ranked number 2 on the list of Best Small Companies from Oct 2014, the growth rate from the data is 53%.

That’s clearly not sustainable and it’s showing up in the numbers now.

Wall Street loves growth, and if a stock with lots of growth expectations doesn’t deliver or it looks like the magic growth mushroom isn’t growing any further, it’s not surprising to see the stock get hammered.

Down about 25% from the peak compared to 0% for the SPY.

Here’s the slowing growth I’m talking about.

THRM Slowing Revenue | Enlarge

If you look at more quarters and compare between comparable quarters (Q1 to Q1, Q2 to Q2 etc) the growth rate comes out to an average of 21% over the past 8 quarters.

That’s high, but I don’t see it being that high for 5 years.

5 years is a number I like use as a measuring stick. It makes for objective valuation easier which I’ll get to below.

Auto Industry is Cyclical

Once the recession hit, the auto stores and parts businesses rocketed up because people were delaying the purchase of new cars.

Over the past few years, consumer confidence has grown and auto sales growth numbers have come a long way.

But for how long?

It’s safe to say that we are no longer in the bottom of the auto cycle but more like between the middle and the peak.

If car sales slow down, then Gentherm will also be affected.

Now I can’t time when the cycle will boom or bust, so the next best thing I can do is to buy on the cheap or when there’s value.

Is the Stock Cheap?

Not right now.

10 years of historical numbers aren’t very helpful because of the W.E.T acquisition.

The numbers from 2011 are the most useful and is what I’m basing my views on.

Here’s a look at the value ratios I focus on.

Gentherm Value Ratios

Certainly not the cheapest numbers for a company with ROIC and CROIC below 20%.

I’d say that an EV/EBIT of 15x is about right though.

A DCF isn’t the best because I want at least 5 solid years of FCF data.

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